US Dollar Direction to be Influenced by G20 and NFPs on Friday

Markets have been locked in a consolidation for most of the day thus far, but we expect this consolidation to come to an end into North American trade. While there was some room for optimism on Thursday following a surprise ECB rate cut which showed the markets that the central bank was willing to move out of its comfort zone in order to help stimulate the local economy (even at the risk of rising inflation), the net result is a lower yielding Euro which reflects a troubled economy in desperate need of stimulation.

The G20 is one of the big events for the day, but we see no reason why this meeting will be any different than any other of this kind which ends up being all talk and no action. But in this case, we agree with the all talk approach. After all, why should there be any action taken by the international community to help a Eurozone region that appears to be riddled with an endless amount of problems and has shown no real ability to competently deal with its own deterioration?

Overall, the risk seems to still be tilted to the downside, and we will be looking for more opportunities to buying the US Dollar and selling some of the higher yielding currencies. The Australian Dollar is one currency which we are very bearish on, and although the economy has held up quite well throughout the crisis, there are now some real signs that things are starting to slow at a more accelerated pace than anticipated. The latest downbeat RBA policy statement confirms our outlook and this coupled with a downturn in the Chinese economy and potential spread of contagion into this region of the world, should in our opinion expose the Australian Dollar to some relative underperformance going forward.

On the data front, European data was quite soft, with PMIs weaker across the board out of Italy, France and Germany, while German factory orders were abysmal. Canada data did not help to prop sentiment any, with employment coming in much weaker than forecast. The jump in the unemployment rate caught many off guard and opened the door for a heavy round of intraday selling in the Loonie. Looking ahead, things pick up significantly into North America with the release of the all important monthly NFP numbers out of the US. Markets are looking for an unchanged 9.1% unemployment rate and 95.0k change in Non-farm payrolls. US equity futures and commodities trade flat into European trade.